Overhead Rate (One Plant-wide Rate) Single Predetermined Overhead ob costing cle overhead rate. Others break the Using the appropriate overhead rates for an and product pricing Different types of allocation enterprises. Some businesses use thes cost down by department Therefore, chon otes for a business helps managers with budgeting for of allocation methods result in varying fiqures for the sees use the simple method of a single overhead rate. Oth choosing the method that provides the most accurate resulte anagers remain competitive within a given articular business can help me owners and managers remain industry Fixed Budget Example uses direct labor hours to assign manufacturing overhead cost to job orders an estimated manufacturing overhead cost of The budges of the GX company shows an estimated manufacturing overhoad forthcoming year. Using the above information, we can compute the predetermined overhead rate base on different allocation base as follows: Suppose GX company uses direct labor hours toase 1. The company estimates that 1,000 direct labors hours will be worked in the forthcoming year. 28 Estimated manufacturing overhead cost Predetermined overhead rate = Estimated total units in the allocation base $8,000/1,000 hours = $8.00 per direct labor hour 2-The company estimates that $15,000 direct labors cost will be worked in the forthcoming year. Predetermined overhead rate = Estimated manufacturing overhead cost Estimated total units in the allocation base $8,000 / $15,000 direct labor cost = x 100% per direct labor cost - The company estimates that 20,000 units will be worked in the forthcoming year. Predetermined overhead rate= Estimated manufacturing overhead cost Estimated total units in the allocation base $8,000/20,000 units = $ per unit 4-The company estimates that 25,000 wat 25,000 machine hours will be worked in the forthcoming year Predetermined overhead rat ned overhead rate Estimated manufacturing overhead cost Estimated total units in the allocation base $8,000/25,000 hours = $ per machine hour 5. The company estimates that $80,0 oct material cost will be worked in the forthcoming year Predetermined overhead rates $8,000 $80,000 direct Estimated manufacturing overhead cost Estimated total units in the allocation base 0,000 direct material cost = X 100% = $ P per direct material cost 100% = $ Departmental Overhead Rates In managerial accounting, rather than using one overhead rate to allocate all of the overhead costs, we can break up overhead costs by department. By using departmental overhead rates, we have the flexibility to use a different activity or cost driverfor each department. Some departments rely heavily on manual labor but other departments rely heavily on machinery. Direct labor hours might been a good indicator of cost in some departments but machine hours might work better for others. The process for calculating the rates is exactly the same as when we calculated predetermined overhead rates. Allocating Manufacturing Overhead Via Departmental Direct Method (Machine Hours Cost Driver) Let's illustrate this method by assuming just two products (X and Y) are being manufactured in a factory that has one service department (Factory Administration, S1) and two production departments (Machining, P1; Finishing, P2). Total Dept's direct O/H Costs Allocation of service dept Total production dept OH Costs Machining (P1) $330,000 70,000 $400,000 10,000 MH $40 Finishing (P2) $90,000 10,000 $100,000 5,000 MH $20 Factory Admin (S1) $80,000 (80,000) $500,000 -O- $500,000 15,000 MH Machine hours Production dept O/H cost per MH MHs required for Product X Mfg O/H costs for Product X $160 $20 $180 MHs required for Product Y Mg OlH costs for Product Y $120 $80 $200 company used a plant-wide rate, the manufacturing overhead rate would have been $33.33 per MH ($500.000 divide MH ($500,000 divided by 15.000 MH), instead of $40 for the machining depan and $20 for the finishing department. By using depa ishing department. By using departmental rates, products requiring more machine hours in a high-cost department will be assigned a higher if using one established plant-wide rate. e assigned a higher cost than would be assigned Overhead Rate (One Plant-wide Rate) Single Predetermined Overhead ob costing cle overhead rate. Others break the Using the appropriate overhead rates for an and product pricing Different types of allocation enterprises. Some businesses use thes cost down by department Therefore, chon otes for a business helps managers with budgeting for of allocation methods result in varying fiqures for the sees use the simple method of a single overhead rate. Oth choosing the method that provides the most accurate resulte anagers remain competitive within a given articular business can help me owners and managers remain industry Fixed Budget Example uses direct labor hours to assign manufacturing overhead cost to job orders an estimated manufacturing overhead cost of The budges of the GX company shows an estimated manufacturing overhoad forthcoming year. Using the above information, we can compute the predetermined overhead rate base on different allocation base as follows: Suppose GX company uses direct labor hours toase 1. The company estimates that 1,000 direct labors hours will be worked in the forthcoming year. 28 Estimated manufacturing overhead cost Predetermined overhead rate = Estimated total units in the allocation base $8,000/1,000 hours = $8.00 per direct labor hour 2-The company estimates that $15,000 direct labors cost will be worked in the forthcoming year. Predetermined overhead rate = Estimated manufacturing overhead cost Estimated total units in the allocation base $8,000 / $15,000 direct labor cost = x 100% per direct labor cost - The company estimates that 20,000 units will be worked in the forthcoming year. Predetermined overhead rate= Estimated manufacturing overhead cost Estimated total units in the allocation base $8,000/20,000 units = $ per unit 4-The company estimates that 25,000 wat 25,000 machine hours will be worked in the forthcoming year Predetermined overhead rat ned overhead rate Estimated manufacturing overhead cost Estimated total units in the allocation base $8,000/25,000 hours = $ per machine hour 5. The company estimates that $80,0 oct material cost will be worked in the forthcoming year Predetermined overhead rates $8,000 $80,000 direct Estimated manufacturing overhead cost Estimated total units in the allocation base 0,000 direct material cost = X 100% = $ P per direct material cost 100% = $ Departmental Overhead Rates In managerial accounting, rather than using one overhead rate to allocate all of the overhead costs, we can break up overhead costs by department. By using departmental overhead rates, we have the flexibility to use a different activity or cost driverfor each department. Some departments rely heavily on manual labor but other departments rely heavily on machinery. Direct labor hours might been a good indicator of cost in some departments but machine hours might work better for others. The process for calculating the rates is exactly the same as when we calculated predetermined overhead rates. Allocating Manufacturing Overhead Via Departmental Direct Method (Machine Hours Cost Driver) Let's illustrate this method by assuming just two products (X and Y) are being manufactured in a factory that has one service department (Factory Administration, S1) and two production departments (Machining, P1; Finishing, P2). Total Dept's direct O/H Costs Allocation of service dept Total production dept OH Costs Machining (P1) $330,000 70,000 $400,000 10,000 MH $40 Finishing (P2) $90,000 10,000 $100,000 5,000 MH $20 Factory Admin (S1) $80,000 (80,000) $500,000 -O- $500,000 15,000 MH Machine hours Production dept O/H cost per MH MHs required for Product X Mfg O/H costs for Product X $160 $20 $180 MHs required for Product Y Mg OlH costs for Product Y $120 $80 $200 company used a plant-wide rate, the manufacturing overhead rate would have been $33.33 per MH ($500.000 divide MH ($500,000 divided by 15.000 MH), instead of $40 for the machining depan and $20 for the finishing department. By using depa ishing department. By using departmental rates, products requiring more machine hours in a high-cost department will be assigned a higher if using one established plant-wide rate. e assigned a higher cost than would be assigned